Fri. Dec 8th, 2023

I believe it’s important for people to think about how their retirement planning is affected by taxes — both now and by potential increases in the future.

The Tax Cuts and Jobs Act, signed into law in December 2017, made changes to income and estate taxes. The cuts are set to expire at the end of 2025. So now may be a prudent time to look at your overall retirement plan and learn about adjustments you may be able to make to alter your tax situation over the next few years and into retirement.

Look at Roth conversions now rather than later

This entails basically paying taxes on some of your traditional IRA retirement funds now and converting them into a Roth IRA, potentially saving on taxes down the road, because tax rates may be lower now than they are in the future.

We’ve noticed many people don’t take advantage of contributions to Roth IRAs or their traditional IRAs on a yearly basis. Some folks may not be able to contribute to a Roth IRA because of their income, but in reality, they could consider a backdoor Roth IRA, which is essentially funding a traditional IRA and converting it into a Roth. There are income limits in funding Roth IRAs — the 2021 phaseout for a Roth IRA for a single person starts at $125,000 and goes to $140,000. For married couples, the range is $198,000 to $208,000.

If your income is too high to contribute to an IRA, you could consider funding an IRA and not deducting it and then converting it to a Roth IRA.

Integrate tax-advantaged buckets

Sometimes people have money sitting in their brokerage account, or money sitting in cash. Every year, they could potentially be moving portions of that to a tax-advantaged account, but they’re not. The compounding effect over the years could really make a big difference.

Having some tax-advantaged buckets where you can pull income from can help you create an income that’s flexible with wherever tax levels are. For instance, let’s say as an example a married couple in 2021 has a taxable income of $100,000, but the tax rate for that is 22%. To reduce their tax burden, they could split up the buckets from which they pull their income into taxable and tax-advantaged. They can get $80,000 from sources that are considered income and do get reported on the income bracket, but they could pull the other $20,000 they need from a Roth IRA. Doing this would potentially bring down their taxable income to $80,000 and knock them out of the 22% tax bracket down into the 12% bracket.

Roth IRA conversions for inheritance

Roth IRA planning also is important from an inheritance perspective. The SECURE Act of 2019 requires complete distribution of an inherited IRA within 10 years with some exceptions, which means fewer years for tax-deferred growth and possibly higher tax bills. Compare that to a person inheriting a Roth IRA. Yes, it still has to be taken out within 10 years, but there are no federal tax consequences for the inheritors because qualified distributions from Roth IRAs are not subject to federal taxes.

So those planning their estates can consider converting a traditional IRA into a Roth IRA to eliminate future tax impacts and leave their heirs a tax-free inheritance. And the longer the funds have the opportunity to grow tax-free, the more powerful this benefit becomes.

Consider future change in filing status

I believe you should look ahead and factor in what happens tax-wise when a spouse passes away. A lot of married couples have a retirement plan in place, but what may not be taken into consideration is how that retirement plan drastically changes income-wise, asset-wise and tax-wise when a spouse passes away.

Maybe there’s a pension involved, and all or half of it goes away. One spouse’s Social Security goes away: Only the higher of the two will stay. If you haven’t filed for Social Security yet, another thing to look at regarding taxation is what you have in qualified accounts — traditional IRAs, 401(k)s — where you pull money out and it’s going to be taxed. It may be feasible to consider living off some of that income before taking Social Security and letting your Social Security benefit increase, which it does until age 70.

Later on, when you start taking Social Security — and remember, your benefit is not all taxable — you’re getting it at a higher amount, meaning then that you would have to take out less from your retirement accounts, which are all taxable. Doing it this way can potentially help the surviving spouse.

When you have all those pieces in retirement, putting them together appropriately can make an impact on taxation. And it can have a domino effect. Therefore, I believe it’s vital to look at these things now and see how they could affect your retirement five, 10, 20 or more years into the future.

Dan Dunkin contributed to this article.

Fee-based financial planning and investment advisory services are offered by Wolfgang Capital LLC, a Registered Investment Adviser in the State of California. Insurance products and services are offered through Wolfgang Financial and Insurance Agency LLC (CA LIC # 0K07551). Wolfgang Capital LLC and Wolfgang Financial and Insurance Agency LLC are affiliated companies. Neither Wolfgang Financial and Insurance Agency LLC nor Wolfgang Capital LLC provide legal or tax advice. You should always consult an attorney or tax professional regarding your specific legal or tax situation.
Wolfgang Capital LLC and Wolfgang Financial and Insurance Agency LLC are not affiliated with or endorsed by the Social Security Administration.

CEO, Wolfgang Capital LLC

Zachary W. Herzog is an Investment Adviser Representative and the CEO of Wolfgang Capital LLC, an Investment Adviser registered in California. Zach is dedicated to helping retirees and pre-retirees protect their finances as a licensed life and health insurance agent (CA LIC# 0H085434) with Wolfgang Financial and Insurance Agency, LLC, an insurance planning firm in the greater Southern California area.

The appearances in Kiplinger were obtained through a PR program. The columnist received assistance from a public relations firm in preparing this piece for submission to Kiplinger was not compensated in any way.

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